Robert Stephens, CFA, discusses the outlook for FTSE 100 retailers Morrisons and Sainsbury’s.
The trading environment for UK supermarkets Sainsbury’s (LON:SBRY) and Morrisons (LON:MRW) has changed dramatically in the past year. Demand for online grocery deliveries has surged in response to lockdown measures. This has forced both companies to make major investments in transitioning from physical stores to digital assets.
Despite their overall success in achieving this goal, and the growth opportunities that online retail provides, the two supermarkets have valuations that appear to be relatively low. As such, they could offer good value for money compared to other FTSE 100 index stocks.
Sainsbury’s online sales more than doubled in its 2021 financial year. In doing so, it has become the UK’s second largest online grocery retailer. Therefore, it could be in a strong position to capitalise on a consumer environment where the proportion of total retail sales conducted online has increased from 7% to 29% in the past decade.
The company’s online growth potential is not limited to groceries. It plans to reduce the number of standalone Argos stores to 100 over the next three years and relocate around 450 Argos stores to existing Sainsbury’s sites. This could provide greater cross-selling opportunities among existing customers of both businesses, while reducing operating costs by £105m by 2024.
The company’s profitability may be catalysed by further cost reductions elsewhere. It plans to restructure its supply chain to integrate Argos and homewares brand Habitat. It expects this to lower costs by £150m over the next three years. This may provide support to margins after the significant investment made in online activities.
Sainsbury’s trades on a forward price-earnings ratio of around 12 despite its shift towards the growing digital space and a forecast rise in earnings per share of 8% next year. As such, it could offer good value for money relative to other FTSE 100 stocks in the current bull market.
Morrisons has also sought to capitalise on changing consumer trends towards online shopping. Its latest quarterly update showed a rise in online sales of 113%, as its partnership with Amazon and the Morrisons.com platform broadened its reach to an increasing number of consumers.
The firm’s digital focus could help to alleviate the pressure felt by value-focused supermarkets in recent years from no-frills retailers such as Aldi and Lidl. Their lack of scaled online presence may mean that Morrisons enjoys more robust levels of customer loyalty, as well as reduced pressure on its margins.
Alongside its increasing online capabilities, Morrisons is developing its wholesale business. For example, it started to supply around 230 additional McColl’s convenience stores in recent weeks, while new supply arrangements with other convenience store operators have been agreed. Wholesale like-for-like sales growth of 21% in the first quarter of the current year shows that it offers far more than just a means of diversifying the firm’s operations.
Morrisons is forecast to post earnings per share growth of 6% next year. Its forward price-earnings ratio of 12 could undervalue its long-term potential compared to other FTSE 100 index stocks that have enjoyed strong share price growth in recent months. With consumer confidence rapidly improving as lockdown measures end, the company’s shares could outperform the wider index in the long run.